Like many others around the world, the life of Apple CEO Steve Job’s fascinated me, and after his untimely death I found myself eagerly reading his biography. Much of his story was known to me, the early days in his father’s garage with Steve Wozniak, the intense pressures of managing Apple’s growing business, his wilderness years and the heroic return to Apple that led to the creation of earth shattering innovations like the iPod, the iPhone and beyond.

I was pleasantly surprised to learn that Steve was very much a product of his generation, and therefore had experiences similar to my own. It was when I read about his trips abroad that I began to see the foundations of his true genius. One passage in particular caught my eye; it was when Steve was tramping around India contemplating the world and all that was changing it. He thought to himself (and I paraphrase) that the intersection of Eastern and Western thought (and North and South for that matter) was going to break the existing paradigm and crate something new, a global culture that was entirely apart from the present. He saw, momentarily, a brand new world and set his mind (and eventually Apple as an organization) to occupy that space – to be a part of that world, to make the ‘new’ happen.

Little did he know how profound that insight was; for that is exactly what he did, he and Apple changed the world. What frustrated so many conventional business partners, financial analysts, and others were Steve’s unorthodox style and his intense determination. He knew that Apple’s business was not represented in the ‘numbers’ and, more importantly, incremental change was not going to create the new. For that he needed to take risks, make quantum leaps. Fueled by his vision he designed products that helped create that new and better future. The fact that Apple is now the world’s most successful company is testament to his vision and his will. In many ways he challenges the rest of us to follow his lead to think different, to be different. For certainly now is the critical moment of truth, we either act boldly now to bring the ‘new’ to life or retreat in panic and confusion.

Things to Think About

1. Your business is a network of human relationships not a set of numbers on your financial statements. Learn the ‘guts’ of your business and like Steve Jobs have the strength of character to think different.

2. Incremental change in a transitioning world buys you time but will not put you on top. RIM is a classic example of a successful company that had a technological lead and then became satisfied with minor improvements. It may have cost them their market share and business.

A few short years ago it was sensible to assume that the global economy was stable and reliable; today we must adjust to a world of financial instability. Consider the following warning from Bill Gross, Managing Director of PIMCO in his June 2012 Letter to Investors:

The International Monetary Fund (IMF) has downgraded its forecast for world economic growth twice in the past few months, while leading economists debate whether 2012 marks a return to growth, or 1932 all over again.

Monetary Crisis

At the base of today’s debt problems lies a global monetary crisis that cannot simply be wished away. When sovereign debt approaches a critical threshold, generally 80% of GDP, red flags are raised, bond markets and rating agencies start to get nervous. Today, although Greece, Spain and Portugal gather all the headlines, the sovereign debt crisis extends far beyond these nations. Consider that ALL European nations including Germany exceed their own legally defined limits of sovereign debt.

The fatal reality is, levels of debt (sovereign, corporate and personal) through out the global economy today are rapidly approaching the breaking point, due largely to an inbuilt paradox in the present monetary system.

The entire capitalist monetary system generates interest-bearing debt as a matter of course. Money creation in all its forms, whether vertical (central bank generated currency and related money) or horizontal (bank loans) triggers interest from its inception, and as a result, is subject to the iron laws of compound interest.

The monetary paradox is simple, but deadly. In straightforward terms, the productive capacity of the economy grows arithmetically (in the 2-4% range), debt, however, grows faster, obeying the abstract laws of exponential progression. Compounding interest rates on debt exceed economic growth rates even in good times, and are doing so today despite massive central bank intervention to keep rates at historic lows. Eventually, compounding debt must exceed the system’s ability to meet even the minimum requirements and the system collapses.

“Even if we lived on an infinite planet, the interest rate on a debt-based monetary system could not exceed the growth rate of the economy (both measured in real terms) over the long term without inevitably causing a major default on debt.” (Minsky 1986).

Who knows what will happen ultimately, but what I can tell you for certain is a new monetary regime will emerge as the global economy reacts to these important developments.

While many authors and authorities are speculating on this subject, history demonstrates clearly that monetary regimes are not established from the top down, by rational discourse and planning. Rather they are established from the bottom up by new and better management of credit systems.

The historic Gold Standard was not designed, it simply became common practice as paper currencies came and went during periods of economic crisis and war in the past. As a universal currency, transferable across national boundaries, golds appeal was obvious. Yet, its monetary role evolved from the bottom up, rather than being designed for purpose.

Our present Central Bank managed monetary regime was born by accident in 1971, when U.S. President Richard Nixon took the United States and the Western world off the Gold Standard (implemented at Bretton Woods in 1944). The monetary vacuum created by the abandonment of Gold was filled by Central Banks, based on the (idealistic) theories of Monetarism and the science of economics.

The present monetary system is intellectually exhausted, presenting policy makers with a ‘Hobson’s choice’ of austerity or Keynesian monetary expansion; neither of which has proven capable of driving sustainable growth. A new monetary regime must solve this dilemma, directing society’s plentiful resources to the productive heart of the economy.

The principles that will govern this new monetary order will likely be the following:

1. A new monetary system must break the cycle of systemic, interest-induced crises, evolving toward a sustainable regime based on value

3. There is no return to a Gold Standard, but money supply must be backed by the productive capacity of the nation. Asset-based money supply will emerge as the only viable alternative to the present Central Bank managed system.

4. The productive assets underpinning the money supply will expand with the introduction of new classes of assets. Total Assets, whether traditional or newer non-traditional assets, whether socially owned or privately owned, will be the bedrock value standard upon which money supply will be rooted.

5. Vertical money supply (currency and related derivatives) created by governments will be backed by the total stock of assets of the nation based on the five capitals, while horizontal money (bank deposits and related derivatives) will be backed by privately owned assets, defined much more broadly than today.

6. The new monetary regime will need to factor in a nations natural and human capital, moving beyond simple exchange value definitions to encompass a full appreciation of the utility value of all asset forms.

We’re in for a wild ride, with no shortage of pain in the short to medium term; however given the growth in new assets and the (presently invisible) undocumented asset potential in all economies, early movers could gain significant advantage on the rebound.

Instability at the core of the modern financial system is a hot topic, particularly given the electoral shocks in France and Greece these days. Whatever the color of the new Greek government, the people of Greece have spoken: the sovereign bond deal is dead as a doornail.

This will almost certainly lead to a more extensive default than the one negotiated in March, sending shockwaves through global markets.

But that’s not the only source of instability in the global financial system according to Andrew Haldane, executive director of stability at the Bank of England.

Andrew likened the present world of banking to the Arms Race between the US and Soviets. The desire to increase individual security created greater systemic insecurity. He goes on to give three similar ‘arms races’ in banking and financial markets.

Return Races

The race for returns was a key reason for the financial crisis. There were two aspects to the race on returns, one the return on equity for banks (ROE) and returns for bank CEO’s. Both of which were unprecedented in any historical context in the run up to the crisis.

Return on equity (in UK banks) was at historic highs in 2007, the only parallel is the 1920’s. The behaviors that drove that were similar to an arms race. It was not so much keeping up the Jones, but keeping up the Goldmans. If Goldman posted a ROE of 20%, all the rest had to meet or beat that figure.

The way this was achieved was taking on additional leverage; which pushed the banks and shadow banks into higher risk positions, creating a higher risk industry ‘equilibrium’ that destabilized the system.

Speed Race

Trade execution times:

20 years ago (minutes), 10 years ago (seconds), 5 years ago (milliseconds), Today its microseconds (million’s of a second)

Tomorrow it will be nanoseconds (billion’s of a second); it could well be picoseconds (trillion’ of a second) in short order.

‘High Frequency Trading’ now dominates mainstream financial markets, accounting for somewhere between 50% and 75% of trades by volume today. The average share on the NYSE is held for 11 seconds.

One reason they dominate markets is that they submit HUGE volumes of quotes the vast majority of which are never exercised. The firms cancel the majority of them before their exercised. Today for every order exercised, 60 are cancelled.

What’s going ON here; fake liquidity. Although it looks like they’re lots of quotes in the market, lots of liquidity – there is actually a mirage of liquidity. Quote ‘stuffing’ is a means of gaming the market. Why, because bandwidth is limited; quote stuffing loads the system slowing down everyone else. Slower traders simply can’t access the board.

Safety Race

The final race is the flip side of the first race; the race for risk aversion is particularly acute in that investors (in banks and other financial institutions) want the safety of collateral. In other words investors in banks are more unwilling to invest in banks on unsecured terms than in the past.

Everyone wants to be senior, everyone wants to be first in line – to have first claim on the assets of the bank. For instance the refinancing of Euro zone banks a few years ago was 60% unsecured, now the unsecured portion is less than 5%.

This race also comes with a price; it leads to bank balance sheets become more encumbered, banks assigning away their assets to investors which can not go on forever. The way it impacts the market is thus: ‘If I’m an unsecured creditor, why would I refinance, why should I let everyone else be ahead of me on the pecking order.

The result is a drying up of the pool of bank capital; a new higher risk equilibrium and destabilized system.

All these ‘races’ are populated with individually rational decisions, the outcome of which is systemically irrational and worse – creating the opposite – systemic instability.

“Greek prime minister has warned lawmakers against undermining reforms agreed with the international lenders in an attempt to boost their popularity as the country heads for the polls in May.”

These recent headlines in the Financial Times expose the uncomfortable truth of our present financial reality. How bad is it? Think Titanic; the banking system essentially hit the iceberg at full speed in 2008. We’ve kept her afloat ever since with massive interventions of TARP funds, bank bailouts, zero interest rates and quantitative easing. But a large gash has been opened in the ship of global Financial Capitalism and the water is rushing in.

I don’t know if you remember the details, but the original Titanic was kept afloat for some time after its tragic accident by the valiant efforts of its crew. In the James Cameron movie we witnessed the heavy bulkhead doors slamming down one after another in an attempt to contain the deadly influx of ocean waters. We have observed much the same in Greece, Ireland, Spain and Italy. The global financial powers have slammed the doors of austerity and debt restructuring on these flooding economies. Unfortunately like the Titanic these chambers are not totally isolatable. In the case of the ship, the water kept rising, eventually overspilling the flooded chambers, filling one after another until the Titanic sank to the bottom of the ocean.

What’s happening in Greece and other affected economies is the fiction of debt resolution. Despite a 100 billion euro default, debt restructuring and the massive support by the ECB the water continues to rise in Greece. The bond friendly resolution has been purchased with the liberty and future of the Greek people. Many young people, all the smart money and anyone else who can walk or run, are leaving Greece at speed while the economy labors under an increasing burden of debt and upwardly ratcheting interest rates. The elections in May are likely to be fought and won by forces deeply opposed to the Euro technocrats that run the government and the financial deal stuck last month. And the water continues to rise; its unstoppable.

In Titanic terms we’re still on the surface, the stars are shinning brightly and the band is playing. However all is not well below the surface; the economic engine room is flooded and water is rising fast on the lower decks. Today the financial press are playing the part of the heroic Titanic orchestra as the situation deteriorates to its dramatic close. It’s a mathematical certainty that the great ship will sink; it’s simply a matter of time. The only unanswered question is: who’ll be in the lifeboats?

There are some troubling indicators on the resource front that could dramatically impact the plans of Western Canadian businesses. Let’s face it the Western resource economy is one of the ‘feel good’ stories in the Canadian economy, so a decline in its growth potential would not be welcome.

Recently, of course, the news has been fairly positive. Apart from declining contract prices for hard coking coal, metal (in particular) and oil prices have been buoyed by massive swings in the indexed commodity funds which have recently shifted back into long positions, based on improving jobs numbers in the U.S., rebounding auto sales and other ‘positive’ news like the Iranian situation (which may result in the closing of the Straits of Hormuz) which could dramatically hike oil prices.

Realistically though, these indicators are not the most significant indicator; that distinction still belongs to China and its continued growth potential.

The Chinese government recently cut growth forecasts to 7.5%, on worries over its over-built property and export manufacturing sectors. These two sectors are highly leveraged but receive the bulk of foreign direct investment in China. The rest of the economy is bank financed and struggling. This is where the problems in China are really starting to get ugly.

China’s growth strategy has always been heavily debt focused. In the early days of the China miracle, the immaturity of its capital markets left China with few financing options. The model that emerged was unconventional, but very effective. Government controlled banks would lend to businesses up and down the economy; they did so without conventional restraints and with few hard-nosed business metrics. As a result many of these loans ended up under-performing or non-performing (NPL’s). Once a decade or so, the Chinese government would acknowledge the problem and clean these NPLs off the bank balance sheets, often writing them off. This process essentially reset the Chinese banking clock once a decade.

According to Michel Pettis the debt problems are emerging once again, only this time the scale of the problem is much greater than in the past: “China has instructed its banks to embark on a mammoth roll-over of loans to local governments. Unfortunately, to date these local government have already accumulated over Rmb10.7tn ($1.7tn) in debts – about a quarter of the country’s output – and more than half those loans are scheduled to come due over the next three years.”

This largely hidden ‘China Problem’ is a function of the rapid growth of un-repayable debts. The Chinese government, for a variety of political reasons, is not inclined to force asset sales. So, although there are no principal payments on these loans, the carrying costs alone will impact China’s growth model, which will clearly be handicapped. Michel Pettis sees debt burdened China growth slowing towards 5-6% annual growth over the next year or so, and longer term settling into the 3% region there after. Not bad, but not sufficient to drive marginal demand for commodities as it has in the past.

The impact on oil and other commodity prices will likely be dramatic, metal prices could fall sharply. None of this is going to happen over night, but over the next few years the sovereign debt crisis could cripple western economies. Optimists who expect China growth to offset this declining demand could be in for a surprise.

I could feel the frustration in my friend’s voice; “Google is reading my email; they recently targeted me with ads that could only have come from analysis of specific words in my private email.” My friend, Mark, is an experienced entrepreneur and no stranger to the ways of business. He went on; “I know Google analyzes my online searches and shopping behavior to send me targeted ads. What I didn’t know is that Google captures and analyzes the content of private emails and uses that data, too.”

Mark’s anxiety is justified; the ads he received were based on data collected from an email to his lawyer about a legal matter; it scared them both. Mark called me because I’ve been investigating capitalism, economics, and the phenomena of Big Data for some time now.

Mark’s concern is not just about corporations accessing and profiting from his personal data; it is much bigger. When a private company can capture correspondence between a citizen and his lawyer, or between a citizen and anyone, it poses a direct threat to democracy because it undermines the principle of individual autonomy.

I said, “Mark, in future the biggest challenge we’ll have to face in saving capitalism is reversing the extraordinary privileges of corporate sovereignty. Think about a world where the citizen, not the corporation, is sovereign. In that world the technical ability to gather personal data from email, Facebook or Google will not determine ownership of that data.

In an equitably capitalist society the citizen owns their own life and all data about his or her private life. Today, companies like Google gather data – for free – from and about us. They just assume they own that data, and earn hundreds of billions of dollars each year. When the citizen controls access to their private data, companies that choose to use it have to rent or buy it.

Here’s my way out of the Big Data dilemma. We would have to begin treating Big Data as an asset, owned by the individual, but aggregated as a social asset leveraged for the benefit of society at large. The idea of leveraging social assets is not new; many resource rich states raise significant public revenues by leveraging the public asset in their oil, gas, mineral, timber, and other natural resources. These non-tax revenue sources fund education, build highways, research and development. In some places royalties on natural resources provide up to 50% of government funds. Alaska, I believe, is even more.

Why not treat personal data as real estate and allow individuals or their local and state governments to charge a royalty for its use? In the case of Big Data the deal for citizens is relatively straightforward. We as sovereign citizens take ownership of our data and choose to create a social asset from that valuable data. Local governments would incentivize citizen participation in creating this asset by providing tax breaks or coupons for services such as medical care.

The idea of business paying a royalty for data is no pipe dream; why shouldn’t Mark’s personal data benefit Mark, his family, and his community? Royalties from Big Data could help rebuild the roads, bridges, and schools in Mark’s neighborhood, in every neighborhood.

And Big Data is only the tip of the iceberg; in an asset revolution like we’re experiencing today, there are a host of new asset classes for individuals and governments to leverage.

For instance, consider the potential value to the taxpayer for underwriting the banking system, with its implicit guarantee? Why should we as citizens provide security to a bank or its shareholders for free? What if they paid (commercial rates) for the public guarantee that allows them to prosper?

The economy is changing radically and although many dangerous trends are obvious there is a world of unrecognized opportunity. Consider that there are over $3 trillion of invisible intangible assets in the US economy alone, and many potential new sources of public revenue as yet unused.

We need to remember the old adage: ‘money doesn’t manage itself’ and recognize that social assets don’t manage themselves either. A determined body of free and sovereign citizens must identify and manage social assets. It is their right and duty to do so.

According to London’s Financial Times leading industrialists in Germany have recommended a new Marshall Plan for Greece, involving both private and public investment.

This is the best (and maybe the only) good news to come out of Europe for many a month. The Marshall Plan, for those too young to remember, was one of the most remarkable initiatives of the Post War era, unprecedented in modern times.

Under the Marshall Plan (named for the Secretary of State George Marshall) the United States committed substantial funds to the reconstruction of war torn Europe. Total investment by the US in the immediate post war period, including the Marshall funds, totaled $25 billion almost 10% of the US GDP. The funds were used to rebuild civil and industrial infrastructure in a devastated Europe.

The Marshall Plan, which was in operation from 1947 to 1951, was surprising in its generosity; victors in war are not noted for their willingness to invest in the vanquished. More importantly the Marshall Plan presented a vast contrast to the hard-nosed tactics employed on Germany and its allies by the Great Powers after World War I.

The success of the Plan contributed materially to the recovery of Europe, which led to the creation of the NATO alliance and (later) the European Union. More importantly it helped heal Europe and put bread on the tables of millions and millions of people. No small accomplishment.

If (and it’s a big IF) the present debt crisis in Greece is going to stabilize somewhere short of default, it must have an upside. Lenders are imposing severe restrictions; Greece is expected to endure crippling austerity, falling lifestyles and real restrictions on its democratic systems and sense of self-determination.

Greece needs a positive future; more than being a wiping boy for global bond markets. The fact that this initiative is emanating from Germany is terribly important, for it is the Germans that are taking the hardest line in this matter. An act of generosity on the scale of the Marshall Plan could not only help the Greek economy, but also heal the wounds that have been inflicted upon the tender sensibilities of modern Europeans. They are badly in need of repair.

Let us hope that this suggestion is acted upon enthusiastically and delivered in the same spirit as the original.